The Big Picture

Tuesday, May 15, 2018

Not a week passes by without some bank in being embroiled in some violation or scam. This happens in many economies and it happens to well-known banks as well as obscure banks. Banks seem prone to mischief. Their mischief often creates huge problems for the economy at large. How we do address banks' propensity to land in trouble. See my article today Banking's toxic culture.

Wednesday, May 02, 2018

Don't miss the terrific two part article on the subject by former RBI Governor Y V Reddy (for once wielding his pen on a political subject). The first part's here and the second part here.

What are some of the arguments made for simultaneous polls. Here's a partial list:

i. The model code of conduct comes in the way of government enacting policies at election time and results in policy paralysis

ii. It's costly to have separate polls

iii. Economic growth suffers because of frequent elections

Reddy demolishes every one of these. If the model code of conduct is a problem, let's modify it suitably. Let governments go ahead and announce polls at election time but let the EC have a panel of independent experts pronounce on these for the benefit of the public.

Costly? Reddy shows that the government expenditure on elections is trivial..

Economic growth has had little to do with frequency of elections or rule by a government by a majority or a coalition government.

So why are the major political parties pushing for it? Data indicates simultaneous polls may work to the advantage of national parties and to the detriment of regional parties.

Simultaneous elections seems intuitively appealing. They provide stability for five years. But this could well come at the cost of greater accountability. It's not enough if the electorate expresses itself once in five years. Periodic voting in states provides valuable feedback to the government at the centre. Reddy quotes B R Ambedkar as saying that responsibility must be preferred to stability. He thinks simultaneous elections could spell the opposte: stability prevailing over responsibility.

Reddy points out that our greatest achievement is making the federal system work. The present proposal could undermine that achievement.

Monday, April 09, 2018

US defense secretary James Mattis greets newly appointed National Security Advisor John Bolton with the words, "“I’ve heard that you’re actually the devil incarnate and I wanted to meet you.”

Bolton is a hawk on security matters- he favours a strike on North Korea and regime change in Iran. Mattis (known during his days in the army as "Mad dog Mattis") has been a sober influence in the Trump regime. How Trump will manage two remains a mystery.

Monday, April 02, 2018

The ET report that the RBI has advised the board of Axis Bank to reconsider the three-year appointment it had given to its MD Shikha Sharma has created quite a buzz.The report suggests that the RBI would like the board to limit her re-appointment to one year during which period the board could look for a successor.

It's not unusual for the RBI to give directions to private bank boards but this typically happens where the banks are in deep trouble or there is grave misdemeanour. Axis Bank has had its share of NPA woes but it cannot, at this point, be said to fall in either category- unless the RBI has information that is not yet in the public domain.

Axis Bank's performance has come in for scathing criticism. For instance, Bloomberg columnist Andy Mukherjee wrote in October 2017:

Sharma, who came to the bank as CEO in 2009, has overseen shareholder
returns of 252%, less than the country’s Bankex index at 270%. On her
watch, $250 million of bad loans has swelled to more than $4 billion,
even as total assets merely tripled. Now,
after the September quarter, annualized credit costs have ballooned to
3.16%. That includes a 1.42 percentage point bump due to the $250
million provision management had to make after the central bank caught
its lie. As for that full-year credit-cost guidance, which the CFO was
planning to lower in July, it’s now been raised to between 2.2% and
2.6%.

In 2017, when her term was renewed for a further three years from 2018 onwards (when it was due to expire), Sharma had already served as MD for eight years. Extending her term until 2021 would have meant that she would serve as MD for 12 years. That's too long for the CEO of a bank and it must happen only in the rarest cases. You need extraordinary performance to justify something like that. Otherwise, a ten-year term is the most one can think for a CEO in banking (or, perhaps, a CEO in any sector).

Sharma's performance, as we have seen, was quite ordinary. The RBI must, in its annual financial inspection, ask the Axis Bank
board to explain what criteria it used for Sharma's appointment for yet another term. Was it the absence of an obvious successor? If so, it represents a failure on the part of the Board. It does not help matters that rumours have been swirling around that the Deputy MD of Axis Bank and the head of its Corporate Banking have tendered their resignations. If true, Sharma will have to leave in a year's time (going by the ET report) and there's no successor in sight.

Tuesday, March 20, 2018

The political backlash to the PNB scam is taking its toll on public sector banks (PSBs). The resolution framework proposed by RBI is likely to make matters worse- most default cases will head almost by, well, default, to the NCLT. PSBs are being denied the capital they need and they are likely to be in a state of limbo while private sector banks steal market share from them.

This is happening because policy makers want this outcome. They want to shrink the role of PSBs and increase that of private sector banks. If the present government is returned to power in 2019, it will move to amend the Banking Regulation Act so that the government's share in PSBs can fall below 51%, thus paving the way for privatisation of at least some PSBs. Until then, however, the Indian economy will pay a price for PSBs being frozen where they are.

Friday, February 23, 2018

The Rs 11,300 crore fraud has create something hysteria over conditions at PSBs. Make no mistake, the sum involved is large and we should be legitimately concerned. However, to use the fraud to make the point that all PSBs are rotten is quite a leap. It's hard to resist the feeling that the fraud is being used to create a case for eventual privatisation of some PSBs and for shrinking the market share of PSBs.

When it comes to frauds, ownership cannot be said to be the crucial factor- think of the colossal frauds that have felled or battered some of the best known banks in the world. And fraud is just one form of violation of regulations and laws. International banks have been involved in numerous other violations in recent years- LIBOR rigging, exchange rate manipulation, mis-selling of retail products, etc. Public memory may be short-lived but those with long enough memories will recall that some of the principal players in the securities scam of 1992 in India were foreign banks.

The RBI's revised framework for stressed asset resolution, released on February 12, has serious issues. The intention is to minimise negotiations between lenders and borrowers and to push most cases to the NCLT. This is, in my view, not the best course to pursue. A negotiated settlement between lenders and borrowers is the best way to salvage valuable assets. Banks face a lethal combination of higher provisions and low recoveries as a result of the RBI's new framework.

My full article in BS:

Resolution framework will crimp growth

T T Ram Mohan

Enough of crony capitalism — that seems to be the tough message of the Reserve Bank of India’s (RBI’s) Revised Framework for Resolution of Stressed Assets released on February 12.

The RBI has scrapped the various schemes introduced over the
years, such as Corporate Debt Restructuring, 5/25 Refinancing of
Infrastructure, Strategic Debt Restructuring, and S4A. These were
all ways of “kicking the can down the road”, that is, giving more time
to promoters to make their companies or projects viable while keeping
provisioning costs low for banks. The RBI seems to have concluded that
these have not delivered — they only enabled promoters to retain control over assets while imposing heavier costs for banks at a later point.

Under the revised framework, bad loans are to be more quickly recognised and provided for. From March 1, for all loans above ~20 billion,
resolution must commence within 180 days of default. Where banks and
borrowers cannot agree on a plan within 180 days, resolution will happen
under the aegis of the National Company Law Tribunal (NCLT). The
defaulting promoters will stripped of ownership and control. Their
assets will be sold to the highest bidder or simply liquidated.

The RBI is administering strong medicine to rid the banking
system of the non-performing assets (NPAs) problem at one go. This is a
laudable objective. However, the RBI must ensure that the medicine does
not kill the patient. Resolution is best effected when economic growth
is buoyant. Borrowers then have a better chance of returning to health
and repaying loans. Lenders are better placed to absorb losses. The revised framework runs
the risk of undermining the ongoing economic recovery and hence
worsening the NPA problem in the very process of resolving it.

Why so? First, NPAs and provisioning in the banking system are
bound to rise as more stringent norms kick in. Most of the ~1.53
trillion that public sector banks (PSBs) will get from the government
over two years under the recapitalisation plan could end up being
absorbed by provisions — and more may be required. There will be no capital to support credit growth.

Secondly, 180 days is too short a period for achieving
resolution. The RBI could argue that banks have had enough time over the
past two or three years to achieve resolution. But, then, banks lacked
the capital to take the hair cuts on loans required to restore
viability to projects. The present bank recapitalisation plan should
have happened three years ago. Delayed resolution is largely the result
of delayed recapitalisation. After providing capital belatedly,
expecting bankers to arrive at resolution in 180 days’ time is a bit
thick.

Thirdly, the requirement that all bankers should agree on
resolution is unrealistic. The RBI must modify the stipulation to state
that banks that account for, say, 75 per cent of the exposure must
agree. Else, very little resolution may happen at the bankers’ end.

Fourthly, while banks are now free to do whatever it takes to
achieve resolution, the old problem remains. Which public sector banker
will take large write-offs of loans and risk investigation after
retirement? The framework requires resolution proposals to get at
least an investment grade rating from rating agencies. How does a
banker decide whether he should get a minimum acceptable rating with a
low write-off or a better rating with a high write-off?

The cumulative result of factors two, three, and four
above will be that the vast majority of bad loans will head for the
NCLT. This is bound to clog up the NCLT system. Besides, the NCLT
process is yet to be tested. For the sale of assets to be worthwhile for
banks, we need a large number of bidders. That is not the experience we
have had in the assets so far put up for sale. There are reports of
waning interest amongst foreign bidders.

As more and more assets come up for sale, there is every prospect
that bidders will dry up. If there are no bidders, assets would have to
be liquidated. This would be a disaster for banks — liquidation will
fetch them very little. It would also be a tragedy for the economy —
huge infrastructure assets that are stalled will amount to nothing.

Growth is the best elixir for an NPA problem. In the early 2000s,
India had an NPA problem that was just as bad. We resolved it by
growing our way out of it. Large projects that have been stalled for
want of funds are an important factor constraining growth in recent
years. So is inadequate growth in credit to the MSME sector.

Bank recapitalisation was supposed to be the key to reviving credit growth. In his Budget speech, Finance Minister Arun Jaitley claimed that the recapitalisation bonds of ~800 billion issued in 2017-18 would lead to additional credit of ~5 trillion. The markets cheered because they thought PSBs would grow credit and profits.

What’s happening on the ground is quite different. Eleven PSBs
have come under Prompt Corrective Action (PCA). The finance ministry has
given some of the PCA banks targets for <i>shrinking<p>
their balance sheets in the next couple of years. The stronger PSBs,
including State Bank of India, have already been hit by rising
provisions. The RBI’s revised framework spells even higher provisions and poor recovery for banks. Credit growth cannot possibly revive under these conditions.

Over the past two years, demonetisation and the introduction of the goods and services tax created
short-term disruption while promising long-term gain. Another
policy-induced disruption is the last thing we need in 2018-19. The RBI
must re-examine its revised framework. The government must plan for higher capital infusion into PSBs and rethink its idea of shrinking some PSBs.